Saturday, February 19, 2011

The Fed regards inflation expectations as an independent variable, capable of producing inflation on their own. In other words, if we all expect higher prices tomorrow, we will buy more today and push prices up. Nonsense, say Austrian economists. People can't will prices higher. If the money supply doesn't increase, the public can't increase its expenditures regardless of anticipation of higher prices in the future. Only the central bank can create inflation, which it does when it accommodates our increased spending by passively providing the reserves (printing money) the banking system demands at any given overnight rate. The output gap sounds great in theory. An economy can only produce what it can produce, given a limited supply of land, labor and capital. If there is more demand for goods and services than producers can deliver, prices rise to allocate the supply. – Bloomberg/Caroline Baum

Dominant Social Theme: Central bankers will get it right as they have in the past ... hey, wait a minute!

Free-Market Analysis: We just noticed Caroline Baum because of a current column, "Fat Lady Wanted as Guide to Fed Rate Setters" and her reference to Austrian free-market economics. It is an amazing column because it does succinctly what most, if not all, mainstream columns will not: It questions the fundamental ability of central banking to ascertain when to expand and contract the money supply.